Your Questions About Advantages And Disadvantages Of Investing In Stocks

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Chris asks…

Roth IRA vs a DRIP fund?

What are the advantages and disadvantages of both…Me and my wife already have 401k’s.that we fund.Right now I have a Drip set up through sharebuilder.com investing in PG,MSFT,BAC,MCD,PEPJNJ.. Do we really need a Roth IRA also.Do not plan to sell stock anytime in next 30 years and we put in about 150-200 dollars a month in it.Thanks ahead.
I use sharebuilder.com and get 20 free trades per month for $20..and each addtional one for$1.Sharebuilder.com also has a tax preperator to help keep up with you aqusitions.

financi4 answers:

Roth IRA’s are the un-disputed best way to save toward retirement.

They are the only type of fund that I know of that not only allows your money to grow – un taxed, but also allows you to withdraw your money un-taxed. (This is the reason the government put’s such heavy restrictions on how much you may deposit per year) For FY2008, the maximum is only $5,000 per year.

Most financial specialists will tell you that you should be investing the maximum allowed by a Roth IRA before you even consider investing in any other type of fund.

Here are the advantages and disadvantages listed by wikipedia in their article.

Advantages
If there is money in the Roth IRA due to conversion from a Traditional IRA, the Roth IRA owner may withdraw up to the total of the converted amount, as long as the “seasoning” period has passed on the converted funds (currently, five years).
Withdrawals of earnings are tax-free once the participant reaches age 59.5 or becomes disabled, so long as the account is “seasoned” (established for five or more years).
Up to $10,000 in earnings withdrawals are considered qualified (tax-free) if the money is used to acquire a principal residence. This house must be acquired by the Roth IRA owner, their spouse, or their lineal ancestors and descendants. The owner or qualified relative who receives the “first time homeowner” distribution must not have owned a home in the previous 24 months.
If a Roth IRA owner dies, and his/her spouse becomes the sole beneficiary of that Roth IRA while also owning a separate Roth IRA, the spouse is permitted to combine the two Roth IRAs into a single account without penalty.[1]
If the Roth IRA owner expects their tax bracket after retirement to be higher than before retirement, there is a tax advantage to making contributions to a Roth IRA over a traditional IRA or similar vehicle. There is no current tax deduction, but money going into the Roth IRA is taxed at the lower current rate, and will not be taxed at the higher future rate when it comes out of the Roth IRA. If a taxpayer is currently in the 15% tax bracket, then a $1,000 contribution to a traditional IRA would provide a $150 reduction in current-year tax liability. If that taxpayer were in the 30% tax bracket upon retirement, $1000 of traditional IRA distributions would incur $300 in taxes. Therefore, the person would pay twice as much for after retirement income as he received in tax benefits from the traditional IRA deduction (and since gains are compounded, this comparison is valid). Therefore, the Roth IRA offers a specific advantage where a person will retire in a higher tax bracket than that used during their pre-retirement years.
The Roth IRA does not require distributions based on age. All other tax-deferred retirement plans, including the related Roth 401(k),[2] require withdrawals to begin by April 1 of the calendar year after the owner reaches age 70½, however, beneficiaries who inherited Roth IRAs are subject to the minimum distribution rules;.
Earnings in a Roth IRA are not taxed if withdrawn after the “seasoning” period. Earnings in a Traditional IRA are taxed as Ordinary Income even if the monies were invested in stocks or mutual funds. It is interesting to note that when stocks or mutual funds are held outside of a 401(k), the long term capital gains are only taxed at 15%. Most middle class Americans will pay at least 28% of the capital gains earned in a traditional IRA as federal income tax. (Though in a traditional IRA, this higher tax rate is a quid pro quo for the deduction taken against ordinary income when putting money into the IRA.)
[edit]Disadvantages
The main disadvantage of a Roth IRA (when compared to a traditional IRA) is that contributions are not tax-deductible. If one contributes $1000 to a traditional IRA while in a high tax bracket, one can often receive a tax deduction, substantially reducing the initial cost of contributing (or, potentially, allowing someone without much disposable income to shelter more income). This is not the case for the Roth IRA. The money in a traditional IRA is taxed once it is withdrawn at retirement.
With a Roth IRA, there are heavy penalties for early withdrawals of earnings (withdrawals up to the total of contributions + conversions are tax-free). An unqualified withdrawal of earnings will result in federal income tax plus a ten-percent penalty on the amount. Fortunately there are many exceptions, such as buying a first home and paying qualified educational expenses.
The perceived tax benefit may never be realized, i.e., one might not live to retirement or much beyond, in which case, the tax structure of a Roth only serves to reduce an estate that may not have been subject to tax. One must live until one’s Roth IRA contributions have been withdrawn and exhausted to fully realize the tax benefit. Whereas, with a traditional IRA, tax might never be collected at all, i.e., if one dies prior to retirement with an estate below the tax threshold, or goes into retirement with income below the tax threshold. It is also possible that tax laws may change by the time one reaches retirement age.

William asks…

ROTH IRA versus DRIP fund?

What are the advantages and disadvantages of both…Me and my wife already have 401k’s.that we fund.Right now I have a Drip set up through sharebuilder.com investing in PG,MSFT,BAC,MCD,PEPJNJ.. Do we really need a Roth IRA also.Do not plan to sell stock anytime in next 30 years and we put in about 150-200 dollars a month in it.Thanks.

I use sharebuilder.com and get 20 free trades per month for $20..and each addtional one for$1.Sharebuilder.com also has a tax preperator to help keep up with you aqusitions.

financi4 answers:

Comparing the DRIP to an ROTH IRA is apples vs oranges.
1st….. I think your DRIP choices are excellent.

It still may be wiser to put the max into a ROTH IRA. Any money in a ROTH IRA will be free of any federal tax FOREVER!!!!!!….. If you purchased stock or stock mutual fund (via a broker or DRIP) you have to pay capital gains on any earnings once drawn……. So if you make $100,000…. You’ll owe $20,000 based on today’s capital gains rate. Given the exact same scenario with a ROTH IRA total tax would be: $0.00………………………….

Enough said!

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